Even as we write the global trade war appears to be going into an endless spiral. One can argue that it was the US that started, but the US is not likely to be the loser in the entire game. The US dollar is still the preferred trade and reserve currency. In the midst of any global capital run, most portfolio flows will still gravitate towards the US. The bigger worry is that most countries, including India, are almost underplaying the consequences of a trade war.
Yes, it was triggered by the US…
The entire trade war began with the US imposing the 25% tariff on steel and aluminum imports into the US. The purported reason for the US was to lessen the impact of the $375 billion trade deficit that the US was running with China. The primary accusation made by the US was that China was subsidizing its domestic companies allowing them to manufacture products at artificially low rates. This allowed them to actually dump products at much cheaper rates into other countries. That argument certainly resounded with a lot of nations across the world, which had similar notions about China. But the speed of reaction was really quick. India, China and the EU have quickly retaliated by imposing counter tariffs on US imports. In most cases, these nations have attacked US farm products. That is not only likely to hit US jobs but also make Trump unpopular in his core strongholds in the US.
But, US will only be a gainer…
In fact, most of the counter tariffs by nations other than the US will not be of any use. Firstly, countries like the EU, China and the rest of Asia are still too dependent on exports to the US. They cannot afford a trade war with the US. Secondly, countries like India have oil has the largest component of its import basket. You really cannot raise the import duties on these products as it has a sharp impact on inflation levels. But the biggest worry for EMs like India is on the flows front. India has already been seeing negative flows in the aftermath of the trade war and money is increasingly turning risk-off. A trade war will only make the flows out of EMs more accentuated. At a time when India is already facing a reduction in weight due to the inclusion of China-A shares, this can be best avoided.
Hey, this is currency war!
The need of the hour is better diplomacy and the EMs like India need to take the lead. The trade war could soon degenerate into a currency war and nobody wants to see the INR beyond the 70/$ mark. The US has collected $775 million from import duties but India is unlikely to have that kind of good luck. India’s interests lie in free trade and that is what must be focused on. A prolonged trade war will not only be a meaningless exercise, but also impute a huge cost on India!
